Personal guarantees in franchising: how to limit your risk

Buying a franchise may require not only the capital to open an outlet, but also a personal guarantee for its obligations. This is particularly important where a company signs the franchise agreement and a shareholder or family member provides the guarantee. Trust matters within a franchise network, but it is no substitute for clear limits on liability. Before choosing a brand, check whether the cost of entry also includes putting your personal assets at risk.

1. Establish who is liable and for which debts

A personal guarantee means that the guarantor undertakes to the creditor to fulfil an obligation if the debtor fails to do so. In a franchise arrangement, the debtor may be the company operating the outlet, the creditor the franchisor, and the guarantor an individual connected with the franchisee.

A limited liability company does not protect you from the consequences of a personal guarantee you voluntarily provide. If a shareholder guarantees the company’s obligations, their liability arises from their own undertaking. This is separate from the rules governing liability for company debts under company law.

Ask for a draft guarantee while you are still comparing franchise offers. Establish:

• who is expected to sign the guarantee and in whose favour;
• whether it covers only the franchise agreement or also supply agreements and other contracts;
• whether it secures existing amounts owed or future debts as well;
• whether it covers interest, contractual penalties and the costs of pursuing claims.

Do not confuse a guarantee under Polish civil law with a guarantee on a bill of exchange or promissory note (an aval), a separate guarantee undertaking, or a declaration of submission to enforcement. These forms of security have different legal bases and consequences. If the network presents several documents, each needs a separate assessment.

2. Understand the rules and the protection they actually provide

Poland has no separate statute comprehensively regulating franchising, nor a generally required statutory pre-contractual disclosure document specific to franchises. A franchise agreement remains an unnamed contract — one without its own statutory category — based on the principle of freedom of contract under Article 353¹ of the Polish Civil Code. General rules on obligations also apply, alongside, depending on the circumstances, competition and industrial property law, among others.

Personal guarantees of this kind are, however, regulated by Articles 876–887 of the Polish Civil Code. The guarantor’s declaration must be made in writing to be valid. A future debt may be guaranteed up to a predetermined amount.

Article 881 is particularly important: unless the parties agree otherwise, the guarantor is liable as a joint and several debtor. This means that, as a rule, the creditor does not have to attempt enforcement against the franchisee’s assets unsuccessfully before demanding payment from the guarantor. Do not assume that the guarantee will only be called upon once every other option has been exhausted.

The guarantor may raise defences available to the debtor, such as the debt having already been paid or not being owed. The Code also provides that a subsequent legal transaction between the debtor and creditor cannot increase the guarantor’s obligation. However, this is no substitute for examining the original scope of the guarantee: broad wording may cover many types of amounts owed from the outset.

3. Negotiate the cap, duration and conditions for demanding payment

The key point is an overall cap on liability, not merely a cap on the principal debt. If interest and costs fall outside it, your actual exposure may exceed the figure highlighted in the document. Ask for clear wording specifying which components fall within the cap and whether it applies across all the agreements covered by the guarantee.

Next, agree how long the guarantee will remain in force. The document should distinguish between the period in which covered obligations arise and the deadline for pursuing them against the guarantor. Ending the franchise relationship does not automatically extinguish liability for earlier debts.

It is also worth negotiating:

• a requirement to notify the guarantor of arrears and provide a breakdown;
• a requirement to demand payment from the franchisee first, allowing a period to settle the debt;
• the exclusion of obligations relating to other outlets or future, separate contracts;
• a reduction in the security required after a period of timely payments;
• the option to replace the personal guarantee with another accepted form of security.

An open-ended guarantee for a future debt can be revoked before that debt arises. However, this is not a general right to withdraw from liability for all amounts owed. Discuss the method of revocation and the point at which the debt arises with a lawyer.

4. Check the impact on your household finances

Before signing, work through a separate scenario: the outlet stops meeting its obligations and the network demands payment from the guarantor. Assess whether meeting the guarantee would require you to sell personal assets or take out another loan. Providing security is not simply a routine part of the franchise application process.

If a spouse is being asked to sign the document, establish whether they are acting as a guarantor or merely consenting to a particular transaction. These are different roles. The effect of their signature on joint marital assets depends on the wording of the documents and the applicable family law rules; it should not be assessed solely by the title of the form.

As a rule, a guarantor who pays the debt can seek reimbursement from the debtor. If the company is insolvent, however, that claim may not result in any money actually being recovered.

Practical takeaway: before choosing a brand, obtain a draft guarantee, decide the maximum loss you are prepared to accept, and negotiate the cap, scope and duration of your liability. Sign only once you also understand the worst-case scenario.